Chapter 5, Problem 3PA

Joint cost allocation

Lovely Lotion Inc. produces three different lotions: hand, body, and foot. The lotions are produced jointly in a mixing process that costs a total of $250 per batch. At the split-off point, one batch produces 80, 40, and 25 bottles of hand, body, and foot lotion, respectively. After the split-off point, hand lotion is sold immediately for $2.50 per bottle. Body lotion is processed further at an additional cost of $0.25 per bottle and then sold for $5.75 per bottle. Foot lotion is processed further at an additional cost of $0.85 per bottle and then sold for $4.00 per bottle. Assume that body and foot lotion could be sold at the split-off point for $3.00 and $3.20 per bottle, respectively.

Instructions

1. 1. Using the market value at split-off method, allocate the joint costs of production to each product.
2. 2. Based on the information provided and your answer to part (1), should Lovely Lotion Inc. continue processing body and foot lotion after the split-off point?
3. 3. Allocate the joint costs of production to each product using the net realizable value method.